401(k) fail: Expert sees ‘totally unexpected’ drop in accounts

September 16, 2014, 7:00 PM UTC
Rescue your 401k
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Even one of the greatest bull markets in history can’t improve the sorry state of 401(k) accounts.

According to a new report from the Center for Retirement Research at Boston College, the 401(k) accounts of workers closest to retirement actually shrunk from 2010 to 2013. The study found that the average combined balance of the retirement accounts of a household headed by someone aged 55 to 64 was $111,000 in 2013. That was down from $120,000 in 2010. The data in the study, which looked at both 401(k) and IRA accounts, came from the Federal Reserve’s Survey of Consumer Finances, which was released earlier this month.

Alicia Munnell, the author of the Boston College study and one of the nation’s leading experts on retirement accounts, called the decline in 401(k) balances of near-retirees “totally unexpected.” Why? Because the drop comes at a time when the market has had an amazing run. Stocks, as measured by the S&P 500, gained 56% in the same period the study examined. That means the average 401(k) account during that period should have at least risen to just over $187,000, a gain of $67,000. Instead, the average account dropped by $9,000.

That drop would have happened if you had done nothing. But that’s not what most people do. No, it’s worse. Most people regularly contribute to their retirement accounts, especially people nearing retirement. The study found that the average 401(k) holder contributed 9.2% of their salary to their accounts every year. And yet the accounts still dropped.

Munnell says she doesn’t have an immediate explanation for why the drop might have occurred. Her study looked at employed people with both a 401(k) and an IRA. So households with no one working, or those who are unemployed, but transferred all of their money to an IRA, would drop out of her data set. That might have affected the numbers. What’s more, as baby boomers retire, they have begun to take their larger on average 401(k)s with them. Munnell also says that rising fees on retirement accounts, particularly with IRA plans, could partly explain why these accounts have performed worse than expected. But fees alone should not create such a big dip.

A federal law passed in 2006 that was supposed to up 401(k) contributions among average workers has not achieved the desired effect. The law encouraged many companies to auto-enroll employees in 401(k) plans at a 3% contribution rate. But most plans don’t increase that contribution rate. So many workers just stick to their to their company’s default rate of 3%, which is actually lower than what the average contribution rate was back in 2006. A relatively weak economy could have dragged down contributions as well.

A few years ago, I wrote a story saying it was time to retire the 401(k) as our nation’s go-to retirement account. The evidence continues to build.

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